Embedded Finance Risks in the Spotlight as Losses Run into the Millions

Elmore, a leading insurance provider to the fintech community in Europe, is highlighting today the risks to the embedded finance market, which has been forecast by PWC to grow fivefold, from US$54.3 billion in 2022 to US$248.4 billion, by 2032.

With the increasing integration of savings, credit, insurance and investing tools into non-financial apps or websites, the sector has seen several examples of large financial losses in the last few years.

“Whilst all fintechs face risks, the consumer duty focus for embedded finance means it is a challenging and costly environment to operate” says Elmore’s managing director, Simon Gilbert, “specifically, electronic money institutions (EMIs) involved in embedded finance require new approaches to mitigating risk as the market grows.”

Elmore has identified the top six risks faced by those operating in the sector as the financial landscape shifts towards embedded finance: regulatory compliance, Authorised Push Payment (APP) fraud and financial crime, cybersecurity threats, system failures, supply chain failures and programme manager/agent failures.

Compliance is increasingly relevant as financial regulations tighten, with EMIs facing the dual burden of escalating costs and the need for meticulous adherence to avoid regulatory oversight, remediation plans and restrictions in trading. The new APP fraud regime further increases the burden on both sending and receiving EMIs.

Cybersecurity is another threat that is increasing as financial crimes rise, forcing EMIs to fortify their defences against data breaches that can erode customer trust and lead to significant financial losses.

Operational disruptions caused by systems failures not only lead to revenue losses but also damage customer relationships and brand reputation. This risk can be exacerbated by supply chain failures where dependency on third parties can expose EMIs to further service interruption.

EMIs are vulnerable to losses from both internal and external fraud, necessitating robust fraud detection, continuous monitoring and prevention systems, with failures by agents or programme managers potentially leading to regulatory action and significant legal costs.

Elmore’s latest report on the issue emphasises the importance of a strategic approach to compliance and risk management for EMIs and highlights a number of risk mitigation strategies, including new compliance solutions to address Dear CEO Letters from Regulators. Insurance cover specifically tailored to the unique risks of the sector is also recommended.

“EMIs are encountering challenges that could significantly impact their operations and customer trust,” says Elmore’s managing director, Simon Gilbert. “Our report draws on Elmore’s in-depth experience in the fintech community and extensive insights from our financial lines loss database, and will help the sector, it’s customers and the wider community minimise risk.”

Download the report and learn about risks, documented losses, risk prevention strategies and insurance options for EMIs and the embedded finance sector.